How China’s “New Retail” Revolution Is Driving the Creation of National Grocery Retailers

After decades of fragmented,
localised grocery chains, some of China’s largest corporations are beginning to
take on the challenge of joining the dots to create national grocery brands.

E-commerce
dominance

Current innovators in the grocery category in China are driven by Asia’s
two largest ecommerce players: Alibaba and JD.com, the parent companies behind
Hema and 7Fresh respectively, stores that dominate the market.

At Hema, show your face to pay.

Both companies have taken on the challenge of building brick and mortar
businesses that can scale to national level.

They can do this because they already have massive numbers of loyal
customers whom they can leverage in purpose-built, offline environments. These are
customers who are spending money online, so they have disposable income, which
means they’re likely part of the expanding middle class, and are therefore
likely looking for the same level of quality and experience that they receive
online.

Offline
transformation driven by an omnichannel approach

Alibaba has been rapidly expanding its new offline retail store format across China. It has opened 65 stores over the last year under the name Hema, taking best practice and new learnings
from their ecommerce business. The stores are designed from the ground up with a mobile-first presentation.

On store entry customers log in to the store app, allowing them to scan product barcodes, discover new background and nutritional info, and to pay. Alibaba is also opening robot-using restaurants, where food is ordered entirely through an app and is delivered by machines.

At Hema, you use your phone to scan products.

At Hema, customers can also choose to take their own produce home, or have it delivered same day (within a three-km radius). Customers can also shop online, with a small army of instore colleagues ready to select, pack and deliver produce to customers within the agreed radius.

Hema store colleague packs customer bag.

JD.com is arguably Alibaba’s largest online competitor, and has now launched its offline store 7Fresh, with ambition to open 1,000 stores. The first store opening was in Beijing’s Dazu Plaza Shopping Centre, which has an aspirational, middle class customer profile.

As a result, 7Fresh provides customers with a broad product range, including globally imported fresh fruit, flowers, meat, and seafood, that is old, prepared and cooked on-site. This range is sourced predictively thanks to owing what they claim is China’s most robust eCommerce system, which, thanks to “big data” tools, enables a number of key innovations.

7Fresh fruit department.

In store, customers can pick up items and additional information is automatically provided on nearby screens thanks to ‘magic mirrors’. Stores also feature smart shopping carts that follow customers around the stores who are willing to wear bands with tracking tags in them.

Hema and 7Fresh are both aiming for Chinese market dominance, but they are also both looking at wider markets, with JD.com beating Alibaba to the opening of the first unmanned convenience store in Jakarta, called JD. ID X-Mart. Catchy.

Live seafood at 7fresh.

The scale challenge

So why is it that in China, a country with plenty of resources and plenty of people to do the work, national-scale grocery retail is only just emerging?

In the West, national
retailers are abundant. Everybody in Britain knows Tesco, and in the US, everybody lives within spitting distance of a Walmart, but in China, this isn’t the case, with fractured grocery store brands proliferating. This is due, largely, to the rate in growth of China’s population, and its only recent adoption to mobile payment from cash.

Wine department at 7Fresh.

Middle class explosion

The country has relatively
recently pushed into the middleclass market, and has seen massive population expansion.

According to the Brookings Institute, 88% of the next billion people to enter the global middle class will be from Asia, with China specifically adding an estimated 350 million people to the middle class between 2015 and 2022.

This more financially free population means more disposable income, and an expectation for greater food quality. According to Paco Underhill, founder and CEO of Envirosell and author of the book Why We Buy: The Science of Shopping, “There is the perception that if I am accessing food products through a modern distribution system, that is one way
of insuring myself against food safety issues.”

These middle-class expectations for healthier, safer produce, coupled with there being no national grocery chain has created the ideal platform for disruptive innovators to enter the market and take it by force.

Phenomenal population growth

Combine this with the knowledge that China’s total population is set to double over the next 30 years, from just over a billion now, to just over two billion by 2050, and the scale of things starts to become apparent.

Transition from cash to mobile pay

A third contributing factor is China’s move from a cash-based economy directly into mobile pay. Due to China’s relatively recent transition from developing to developed nation in terms of its economics, the country remained a cash-based nation until the last decade, bypassing card payment almost entirely. In this time, the ubiquitous WeChat social platform had taken China by storm, with 1.1bn monthly users
recorded in 2018.

Now combine this with Alibaba’s introduction of AliPay to decrease the friction of online shipping, the fact that developers could produce a payment system built for the mobile-first world, without the fifty-year legacy of the card-payment system in the West.

Aldi Shanghai

We have shown that explosive population growth and a switch to new payment technologies has enabled disruptive Chinese retailers to create innovative retail concepts that are scalable.

Aldi Shanghai bakery.

Other retailers have begun to mimic some aspects of what Alibaba and 7Fresh are doing, including Aldi, who have just launched in China with two concept stores, and are looking to use WeChat to offer products with instant delivery within three km of each store.

It seems inevitable that China’s grocery scene will reach national level as infrastructure and tastes develop. At CADA, we’re looking forward to being part of that change.